Sony Activist Loeb May Bring More Problems Than Solutions in Japan

Sony Corp. (NYSE: SNE) is having an unusually good day on Tuesday. After having benefited from the Abe inflation pump from the Bank of Japan, now Sony ADRs have hit a new 52-week high in New York trading as activist investor Dan Loeb is urging for a partial breakup of the Sony empire. 24/7 Wall St. has warned of an activist investor bubble recently. This may be one instance when more problems are created by Third Point in activist efforts than there are solutions for long-term shareholders in Sony.

A May 14 letter was sent to Sony President Kazuo Hirai suggesting that Sony should create an IPO for a minority stake in Sony Entertainment. The rationale is that Sony would then have enough capital to improve on the electronics unit and on PlayStation. It is not the first, and likely will not be the last, call from outsiders that Sony has been unable to unlock the value of its entertainment unit.

Sony quickly responded that the entertainment unit is not for sale and that it is already trying to strengthen up where Dan Loeb wants improvements. Unfortunately, Sony cannot lie or sugarcoat its way out of almost a decade of losses in its television unit.

Dan Loeb may be fighting an uphill battle here. Investor activism is not given the same ear from corporate boards in Japan. Often activist efforts in Japan can be viewed by the company’s board and management as a personal offense or a dishonorable effort. Loeb’s plan also has the gimmick of the past tracking stock we saw a decade ago, and ultimately one can argue that it is simply phantom value that is created. By removing the strengths of the entertainment unit from the core operations, Sony also might be featured as an even weaker company than it is now.

Will Loeb win? It seems doubtful, but the policies presented are geared around thriving off of the new easy money monetary policy installed by Abe in Japan. Loeb does own close to a 6.5% stake, with some 64 million Sony shares.

Investors may get to unlock the value here if Loeb wins. At issue is that Loeb’s efforts simply may weaken the core electronics business, as the entertainment unit could be evaluated on its own rather than providing cover for the whole company. If you want to know just how bad things are at Sony, the ADR price might say it all. Even after a huge Abe-influenced bounce in the share price, Sony trades at less than half its prerecession share price. That same share price is only about one-sixth of its peak back in the year 2000.

Sony ADRs hit a new 52-week high of $22.22 earlier on Tuesday, and the stock is still up 8.5% at $20.50 after about two hours of trading. The trading volume of 17.5 million shares in New York is already closing in on six-times normal trading volume.